Tech

Dell sees more pressure on margins ahead

SAN FRANCISCO (MarketWatch) - Dell Inc. officials said Tuesday that while they believe the computer-industry giant is in a position to see its business improve over the next year, its earnings will remain pressured by broad weakness in demand from its long-time core base of business customers.

Dell Chief Executive Officer Michael Dell and Chief Financial Officer Brian Gladden gave the assessments during the company's annual analyst meeting in Austin, Texas. The meeting was held less than a day after the company said its second-quarter sales should increase slightly, but its gross margins will decline from Dell's first-quarter results.

During its first quarter, Dell reported sales of $12.34 billion and gross margins of 17.6%.

The outlook and comments were enough to drive Dell's
DELL
shares down $1.05, or 8%, to close at $11.97.

Michael Dell remained upbeat about Dell's opportunities, but was also realistic about the economic situation has affected the status of IT spending.

"Customers are lengthening the life cycle of the [technology products] they are deploying," Dell said. "2009 has seen a pretty significant deferral that sets us up for a significant [product] refresh in 2010."

Gladden gave more details about why Dell expects its gross margins are being hampered in the current economic environment. Gladden said increases in component pricing, specifically with regards to LCD computer monitors, and computer memory, has impacted Dell's consumer business, and its enterprise business is also finding it hard to return to consistent growth.

"Our large enterprise and small-and-medium sized business [sales] are still very weak," Gladden said. "They're are not deteriorating, but they're not getting much better." Gladden also said that Western Europe is currently the "toughest market" for Dell's business.

Gladden added that Dell remains on track to take $4 billion out of its cost structure and would continue to take steps that favor growing its earnings over taking market share away from competitors.

Gladden also said Dell was standing by its longer-term goals of 5% to 7% annual year-over year revenue growth, and operating margins of 7% of total revenue.

However, some analysts who were disappointed with Dell's update, said the company has its work cut out for it to reach those goals.

"We believe most investors were surprised that gross margins would be down, quarter over quarter, for the July quarter," said Keith Bachman, of BMO Capital Markets. "Dell will not reach 7% operating margins as soon as it reaches its revenue growth targets."

Collins Stewart analyst Ashok Kumar agreed with Bachman's assessment, and added that other steps that Dell might take are not guaranteed to get the company's earnings back in order.

"Any acquisition of [significant] size carries integration risks. Likewise, cost cuts may not by itself be a necessary and sufficient condition for Dell to maintain operating margins above 7%."

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